Inflation (and new tax law) effects on 2018 federal tax deductions, exemptions and itemized limitations
Maps show crazy U.S. quilt of state sales tax nexus laws

Retirement plan inflation adjustments for 2018

Welcome to Part 3 of the ol' blog's series on 2018 inflation adjustments. 
Today we look at changes next year to retirement and pension plans.
You can find links to all 2018 inflation posts in the first item:
Income Tax Brackets and Rates.
Note: The 2018 figures apply to 2018 returns that are due in 2019.
New tax laws also have altered some of the 2018 amounts and are noted in the post below.

For comparison purposes, you'll also find 2017 amounts to be used
in filing 2017 returns due next April.

Maxing out your retirement plans, both those offered at your job and your separate IRAs, can help you build an overflowing nest egg.

As Congress explores tax reform (or maybe just tax cuts), tax-favored retirement plans are coming under added scrutiny. There's talk of limiting even more the amounts we can put into some workplace plans, as well as taking away the up-front tax benefits of contributions.

Until that happens, though, we're going with the retirement plan amounts, both contribution to plans and income levels that could affect how much can be contributed, that the Internal Revenue Service reviews each year for possible inflation adjustments.

UPDATE, March 9, 2018: The Tax Cuts and Jobs Act was enacted, but it didn't make changes to tax-favored retirement savings options. The IRS reviewed the new law's change to chained consumer price index requirements and found that it didn't affect its original 2018 retirement plan inflation adjustments. So the good news, for me who doesn't have to re-do this post, as well as all of us as taxpayers saving for our post-work years, is that this section/post in the 2018 inflation series is unchanged! 

Technically, the annual tweaks to retirement pension plans and other retirement-related items are cost of living adjustments, or COLAs.

And while many are adjusted, in the coming 2018 tax year some things will remain the same as in 2017.

IRAs remain the same: That's the case with some components of individual retirement arrangements — and yes, arrangement is the official name, although most of us, me included, refer to it an individual retirement account, so let's just go with the shared acronym IRA.

When it comes to IRAs in 2018:

  • The contribution limit to either a traditional or a Roth IRA remains unchanged at $5,500.
  • The additional catch-up contribution limit for individuals age 50 and older is not subject to an annual COLA, so it too remains at $1,000.
  • The catch-up contribution limit for employees age 50 and older who participate in 401(k), 403(b), most 457 plans and the federal government's Thrift Savings Plan remains unchanged at $6,000.

Now to the retirement plan changes that are affected by inflation/COLAs.

Earn more, put more in your IRA: Traditional IRAs are still popular because if you or your spouse don't have retirement plans at work, you can deduct your full IRA contribution.

If, however, either married partner is covered by a workplace retirement plan, the deductible amount of a traditional IRA contribution is phased out or totally eliminated depending on your filing status and income.

For 2018, you also can earn a bit more before you hit the level where your traditional IRA contributions are reduced or are no longer deductible.

The table below shows the income phase out ranges in 2018 for IRA contributions, along with those in effect for 2017 in case you'd like to add a bit more money to your IRA before Dec. 31.

  2018 phase-out range 
based on *MAGI
2017 phase-out range 
based on *MAGI
Singles and Heads of Households who are covered by a workplace retirement plan $63,000 to $73,000 $62,000 to $72,000 
Married couples filing jointly and the spouse making the contribution is covered by a workplace retirement plan $101,000 to $121,000 $99,000 to $119,000
Married couples filing jointly and the spouse making the contribution has no workplace plan but his/her spouse is offered a retirement plan at his/her job $189,000 and $199,000 $186,000 and $196,000
A married individual filing a separate return and is covered by a workplace retirement plan** $0 to $10,000 $0 to $10,000

*MAGI is modified adjusted gross income. (Shameless plug: You can check out the ol' blog's glossary for more on MAGI, as well as the previously mentioned individual retirement arrangement/account and lots of other tax terms.)
**No annual inflation adjustment applies in married filing separately situations

More room for Roth contributions: Roth IRA contributions, which are not tax deductible, but are not taxed upon withdrawal in retirement, also face some income limits.

For 2018, taxpayers' Roth contributions are reduced if their earnings are within the income ranges in the following table.

  2018 phase-out range
based on *MAGI
2017 phase-out range
based on MAGI 
Singles and Heads of Households $120,000 to $135,000 $118,000 to $133,000
Married couples filing jointly $189,000 to $199,000 $186,000 to $196,000

Again, note the top dollar amounts. Once your income exceeds the maximum amount for your filing status, you cannot contribute to a Roth IRA.

You can, however, contribute to a traditional IRA and then convert that to a Roth.

Some workplace plan changes, too: Also in 2018, inflation means some increases in a variety of plans, both provided by workplaces and for self-employed workers.

The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increases in 2018 to $18,500 from the $18,000 allowed in 2017.

SEP-IRAs (or, from the glossary, Simplified Employee Pension) and Solo 401(k) are popular retirement vehicles for the self-employed and small business owners.

The maximum amount that can be put into either of these plans as an employer, determined by a percentage of salary, goes up in 2018 to $55,000; it's $54,000 for the 2017 tax year. The compensation limit used to make the calculation also goes up from $270,000 in 2017 to $275,000 in 2018.

If you have a SIMPLE, or savings incentive match plan for employees (final, I swear, glossary plug), the limit on SIMPLE plans for 2018 remains the same as this year: $12,500. The SIMPLE catch-up limit next year also remains at $3,000.

And where a company offers the traditional defined benefit plan, the limitation on the annual benefit of this retirement plan goes up next year to $220,000. In 2017 the limit is $215,000.

Get added credit for saving: The saver's credit, or the Retirement Savings Contributions Credit as it's officially titled, is a tax break the rewards low- and moderate-income individual for adding to their nest eggs via the many options noted above.

You can claim this credit, which maxes out at $1,000, as long as you don't make more than the earnings limit for your filing status.

In 2018, the saver's credit maximum earnings caps go to:

  • $63,000 for married couples filing jointly, up from 2017's limit of $62,000;
  • $47,250 for heads of household, up from $46,500; and
  • $31,500 for singles and married filing separately filers, up from $31,000.

If you want to peruse the official details on upcoming retirement plan COLAs, check out the IRS' notice on the 2018 pension plan limits and contributions.

You also can read more on the 2018 inflation adjustments to other tax provisions by checking the index at the end of the first post in this series, which covers next year's tax rates and income tax bracket. And because this tax inflation series falls over the weekend, this week's By the Numbers honor goes to tax year 2018.

Regardless of what kinds of savings vehicles you use to prepare for retirement, put as much as you can under the IRS' inflation limits into the accounts. When you finally clock out for the final time, you'll be glad you did.



Feed You can follow this conversation by subscribing to the comment feed for this post.

The comments to this entry are closed.